What Does the Government’s Climate-related Financial Disclosure Consultation Paper Mean for Business?
Since 2023 started with highly anticipated releases of the review into Australia’s carbon market and the proposed Safeguard Mechanism reforms it’s easy to forget that at the end of 2022, the Treasury released its consultation paper into the design of a mandatory climate-related financial disclosure framework. It marked another big shift in Australia’s regulatory environment, with reporting intended to support Australia’s climate change targets and net zero goals and will form part of a broader sustainable finance framework to be developed in close coordination with the Council of Financial Regulators.
A key turning point in climate risk reporting
This announcement is a noteworthy, but anticipated step towards increased climate risk reporting the government had indicated it was pursuing in the climate change bill. The October budget stated that “the Government is committed to introducing standardised, internationally-aligned requirements for large businesses and financial institutions to make clear, credible and globally comparable disclosures of their climate-related risks, and opportunities and plans”.
Australia has seen robust support from business and solid uptake of the global blueprint for climate risk reporting by the Task Force on Climate Related Disclosures (TCFD), however the challenges have revolved around the quality and standardisation of these disclosures. It is expected that the government’s final framework will be closely aligned with TCFD reporting and the International Sustainability Standards Board (ISSB) which should take meaningful steps to combat these traditional challenges.
Climate-related financial disclosures – stakeholder inputs wanted
The paper seeks stakeholder inputs into the design of a framework aiming to “provide investors with decision-useful information about the financial risks that firms face from climate change and to provide regulators with information to identify and manage systemic risks.” The thinking is that by mandating and standardising requirements; comparability, credibility, decision-usefulness of disclosures for investors and regulators across governance, strategy, risk management, targets and metrics – including greenhouse gas emissions – will improve.
As it is proposed currently, the requirements will be mandatory for certain large, listed businesses and financial institutions, and comparable Commonwealth public sector corporate entities and investment funds. The inclusion of large private businesses is up for consultation, in line with similar developments in NZ, the UK, the EU, US, and Singapore.
Indications are that reporting requirements will commence in 2024 for a subset of the Australian economy as outlined above for FY25 reporting, with the plan being to phase in other business sizes and types later on. Size thresholds are under consultation depending on a range of factors such as market capitalisation, turnover, and/or number of employees.
The key to a network of interlinked components of corporate climate action
Mandatory reporting is widely understood as the transformational step for corporate climate action, especially since approaches to definitions, accounts, and targets have rapidly been evolving globally. Some examples include:
- Net zero commitment frameworks, such as UN Race to Zero and GFANZ
- GHG accounting with the Partnership for Carbon Accounting Financials on financed emissions in 2020 and insured emissions in 2022, land based carbon accounting (GHG Protocol, 2022) and whole of life carbon in built environment (WGBC)
- Setting net zero targets like Science-based Targets for companies and Financial Institutions, the new ISO standard Net Zero guidelines, or the brand new net zero target setting protocol for the insurance sector (NZIA, 2023)
- ESG / non-financial reporting and climate reporting standards such as the Task Force on Climate Related Disclosures (TCFD), International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI)
- Taxonomies in the European Union and the United Kingdom, and the increasing crack downs on greenwashing by regulators such as the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA).
When combined, you get a robust network of interlinked standards, frameworks, guidance and tools that leave less and less room for interpretation and ways to get out of genuine decarbonisation. It also gives business guidelines and guardrails to progress and accelerate their sustainability actions and plans, in line with best practice and in anticipation of stricter regulation.
Taken together, mandatory reporting is expected to fast track capital alignment with the Paris Agreement and decarbonisation in line with 1.5D warming.
Climate disclosures will have implications for business of all sizes
The implications for business, even if not covered by the reporting requirements, will filter down via investor, lender, and clients’ requests for information. Every business that needs access to finance and insurance will need to get their house in order to understand their GHG emissions, their risks, and have a clear and transparent transition plan.
This is more urgent for emissions intensive businesses and those larger in size – but ultimately – these standards and expectations will include estimated emissions from every business, and investors and lenders will have an easier task of comparing different investment and lending choices to understand their resilience to climate risk and overall carbon intensity.
A warning to company directors – take note of your climate risk
The announcement also puts company directors on notice. Managing climate-related risk is a key director responsibility and climate change will be increasingly a key aspect of performance and compliance. ASIC “considers that the law requires an operating and financial review to include a discussion of climate risk when it is a material risk that could affect the company’s achievement of its financial performance.” ASIC’s climate change risk guidance for directors suggests the following steps:
- Consider climate risk
- Develop and maintain strong and effective corporate governance
- Comply with the law
- Disclose useful information to investors
ASIC also recommends companies undertake TCFD reporting as best practice. It is imperative for directors to consider when embarking on a net zero pathway or broader ESG strategy, that the pathway and goals are clear, accurate and transparent; and that they are validated by robust verification processes to avoid exposure to directors of greenwashing and regulatory scrutiny.
Litigation against companies around the world is increasing with areas being contested including emissions reduction commitments, greenwashing, and attribution of responsibility for adverse climate impacts. Baker McKenzie’s The Year Ahead report for 2022 highlighted climate change disputes in particular have seen an unprecedented rise, with over 2,000 ongoing or concluded climate change cases around the world (more than double the number in 2015). Learn more in ESG Trends in Asia Pacific: Disputes, Reporting and Beyond.
Current litigation against a global company going through the motions in the UK is aiming to hold directors personally liable for failing to properly manage climate risk. This issue is something directors cannot afford to keep in the ‘too hard basket’ anymore. There is a wealth of resources for directors and boards such as the Climate Change risk disclosure from the Governance Institute and the Australian Institute for Company Directors Climate Risk governance guide available for guidance. Additionally, consulting agencies such as Ndevr Environmental have a team of experts available to advise boards and directors on the what, when, why, and how – to plan.
Climate disclosures – where does this leave us?
Mandatory reporting will effectively make it increasingly hard for businesses that do not plan for the transition to net zero to access capital and stay competitive. Ultimately, there is a likelihood that within this decade, GHG accounts will be as important a performance measure as financial accounts.
Need guidance around your climate-related financial disclosures or climate risk reporting?
We support businesses across all stages of their climate risk reporting including frameworks such as TCFD, PCAF, ISSB standard and more. We’ve been technical experts and trusted advisors to some of Australia’s most well-known companies for over a decade, contact us to learn more or Call +61 3 7035 1740